District Court Holds Compelled Entry of Password for Encrypted Files Is Testimonial and Therefore Privileged

U.S. Magistrate Judge Niedermeier, in the District of Vermont, held that the compelled entry of a password required to access alleged pornography on a laptop computer would violate defendant's Fifth Amendment right against self-incrimination. In a case of first impression, the Court held that the act of entering the password, even without disclosing it to the government, would be "testimonial," and therefore privileged. In re Boucher, No. 2:06-mj-91 (D.Vt.,2007)

In December 2006, Defendant Boucher was arrested for transportation of child pornography at the Canadian border after a search of his car uncovered a laptop computer. The arresting officer (Curtis), according to the Court, "located approximately 40,000 images, some of which appeared to be pornographic based on the names of the files."

The Court noted that at the time of the arrest, the officer "opened the computer and accessed the files without entering a password." Under questioning, having waived his Miranda rights, Boucher told Curtis that he downloads many pornographic files from internet newsgroups; and sometimes unwittingly downloads child pornography that he deletes when he realizes what he has."

According to the Court, Agent Curtis asked Boucher to show him where the files he downloaded from the newsgroups were located on the laptop; and Boucher was allowed access to the laptop and navigated to a part of the hard drive designated as drive Z. The Court reports that "Agent Curtis did not see Boucher enter a password to access drive Z." After further examination, according to the Court, "Curtis located several images and videos of child pornography in drive Z." After consulting with the United States Attorney's office, Agent Curtis arrested Boucher, and seized the laptop as evidence after shutting it down.

Two weeks later, Mike Touchette of the Vermont Department of Corrections took custody of the laptop, and created a mirror image of its contents. On examination, he discovered that he was unable to access drive Z because it was encrypted by the program Pretty Good Privacy, which required a password to access drive Z. According to the Court, "since shutting down the laptop, the government has been unable to access drive Z to view the images and videos containing child pornography."

Secret Service Agent Matthew Fasvlo, who has experience and training in computer forensics, testified that it is nearly impossible to access these encrypted files without knowing the password. There are no "back doors" or secret entrances to access the files. The only way to get access without the password is to use an automated system which repeatedly guesses passwords. According to the government, the process to unlock drive Z could take years, based on efforts to unlock similarly encrypted files in another case. Despite its best efforts, to date the government has been unable to learn the password to access drive Z.

A grand jury subpoenaed Boucher to provide the password necessary to access the files on the computer. Boucher moved to quash the subpoena on the grounds that it violates his Fifth Amendment right against self-incrimination. At a hearing on the motion, according to the Court, the government proposed that Boucher could enter the password without the government, the grand jury, or the Court observing or recording the password. The government also proposed that the Fifth Amendment issue would be avoided if the Court ordered that the act of entering the password could not be used against Boucher.

For the Fifth Amendment privilege against self-incrimination to apply, according to the Court, "the communication must be compelled, testimonial, and incriminating in nature." According to the Court, "because the files sought by the government allegedly contain child pornography, the entry of the password would be incriminating." Thus, "whether the privilege against self-incrimination applies… depends on whether the subpoena seeks testimonial communication."

According to the Court, "the government concedes that it cannot compel Boucher to disclose the password to the grand jury because the disclosure would be testimonial," but "the question remains whether entry of the password, giving the government access to drive Z, would be testimonial and therefore privileged."

The Court found that "compelling Boucher to enter the password forces him to produce evidence that could be used to incriminate him." The Court explained that "producing the password, as if it were a key to a locked container, forces Boucher to produce the contents of his laptop."

The act of producing even unprivileged evidence can have communicative aspects itself and may be "testimonial" and entitled to Fifth Amendment protection. United States v. Doe, 465 U.S. 605, 612 (1984) [hereinafter Doe I ] ("Although the contents of a document may not be privileged, the act of producing the document may be."). An act is testimonial when the act entails implicit statements of fact, such as admitting that evidence exists, is authentic, or is within a suspect's control. Doe v. United States, 487 U.S. 201, 209 (1988) [hereinafter Doe II ]. The privilege against self-incrimination protects a suspect from being compelled to disclose any knowledge he has, or to speak his guilt…. The suspect may not be put in the "cruel trilemma" of choosing between self-accusation, perjury, or contempt….

The government relied on Doe II, where the Supreme Court upheld a subpoena requiring the defendant to sign a form requesting bank records from the Cayman Islands. The Court found that the form did not acknowledge any accounts and made no statement, implicitly or explicitly, about the existence or control over any accounts. As characterized by the Court, the Supreme Court held that "because signing the form made no statement about the suspect's knowledge, … the act lacked testimonial significance and the privilege did not apply." In this case, however:

Entering a password into the computer implicitly communicates facts. By entering the password Boucher would be disclosing the fact that he knows the password and has control over the files on drive Z. The procedure is equivalent to asking Boucher, "Do you know the password to the laptop?"If Boucher does know the password, he would be faced with the forbidden trilemma; incriminate himself, lie under oath, or find himself in contempt of court.

Unlike the situation in Doe II, Boucher would be compelled to produce his thoughts and the contents of his mind. In Doe II, the suspect was compelled to act to obtain access without indicating that he believed himself to have access. Here, when Boucher enters a password he indicates that he believes he has access.

The Court noted that "in distinguishing testimonial from non-testimonial acts, the Supreme Court has compared revealing the combination to a wall safe to surrendering the key to a strongbox." According to the Court, "the combination conveys the contents of one's mind; the key does not and is therefore not testimonial." The Court found that "a password, like a combination, is in the suspect's mind, and is therefore testimonial and beyond the reach of the grand jury subpoena."

With respect to the government's offer to restrict the entering of the password so that no one views or records the password, the Court acknowledged that "this would prevent the government from knowing what the password is," but "it would not change the testimonial significance of the act of entering the password."

Boucher would still be implicitly indicating that he knows the password and that he has access to the files. The contents of Boucher's mind would still be displayed, and therefore the testimonial nature does not change merely because no one else will discover the password.

The government's offer not to use the production of the password against Boucher, according to the Court, is based on the same argument the Supreme Court rejected in United States v. Hubbell, 530 U.S. 27 (2000). In that case, the government granted Hubbel immunity in connection with the production of documents, and then charged Hubbell with fraud. The government argued that it was not making improper use of the production because it did not need the act of production itself as evidence and the documents themselves were unprivileged.

The Court in Hubbell "found that the act of production had testimonial aspects, because production communicated information about the existence, custody, and authenticity of the documents." "Here, as in Hubbell," according to the Court, "the government cannot separate the non-testimonial aspect of the act of production, entering the password, from its testimonial aspect."

The testimonial aspect of the entry of the password precludes the use of the files themselves as derivative of the compelled testimony. Any files the government would find based on Boucher's entry of the password could not be used against the privilege against self-incrimination does not apply to an act of production if the existence and location of the subpoenaed evidence is known to the government and the production would not "implicitly authenticate" the evidence.

As recounted by the Court:

In Doe III, the suspect had produced a photocopy of a personal calendar but the Government suspected that the calendar had been altered through the whiting out of incriminating entries…. The government subpoenaed the suspect to produce the original calendar before the grand jury…. The Second Circuit reasoned that the existence and location of the calendar was a "foregone conclusion" because it was known, through production of the photocopy, that the suspect had possession of the calendar and the original calendar added little or nothing to the sum total of the government's information…. The court also found that act of production itself was not necessary to authenticate the original calendar because the Government could authenticate it simply by comparing it to the photocopy…. Therefore, because the government had knowledge of the existence and location of the original calendar and did not need to use the act of production to authenticate the original calendar, the suspect had no act of production privilege and was required to produce the original calendar before the grand jury….

"Here," according to the Court, "the subpoena can be viewed as either compelling the production of the password itself or compelling the production of the files on drive Z. Both alternatives are distinguishable from Doe III."

If the subpoena is requesting production of the files in drive Z, the foregone conclusion doctrine does not apply. While the government has seen some of the files on drive Z, it has not viewed all or even most of them. While the government may know of the existence and location of the files it has previously viewed, it does not know of the existence of other files on drive Z that may contain incriminating material. By compelling entry of the password the government would be compelling production of all the files on drive Z, both known and unknown. Unlike in Doe III, the files the government has not seen could add much to the sum total of the government's information. Therefore, the foregone conclusion doctrine does not apply and the act of production privilege remains.

Since the government is trying to compel the production of the password itself, the foregone conclusion doctrine cannot apply. The password is not a physical thing. If Boucher knows the password, it only exists in his mind. This information is unlike a document, to which the foregone conclusion doctrine usually applies, and unlike any physical evidence the government could already know of. It is pure testimonial production rather than physical evidence having testimonial aspects. Compelling Boucher to produce the password compels him to display the contents of his mind to incriminate himself. Doe III did not deal with production of a suspect's thoughts and memories but only previously created documents. The foregone conclusion doctrine does not apply to the production of non-physical evidence, existing only in a suspect's mind where the act of production can be used against him.

Eighth Circuit Blocks Sharing of Leased Broadband Radio Service Channels With Licensee's Competitor

A unanimous panel of the Eighth Circuit Court of Appeals blocked a Sprint subsidiary's customer from sharing leased Broadband Radio Service channels with a Sprint competitor. PCTV Gold, Inc. v. Speednet, LLC, No. 07-2189 (8th Cir., November 29, 2007). The Court upheld a district court finding that Sprint was likely to prevail on its claim that Speednet, LLC's proposed joint venture with Clearwire, Inc. in Saginaw, Michigan, would breach a "Right of First Offer," which ostensibly required SpeedNet to offer to sell its assets to Sprint before selling to any other party. The Court found that Sprint would suffer irreparable harm "if the district court should later find Sprint is entitled to specific performance" because "it will be difficult if not impossible to undo the transfer of assets to Clearwire."

The Sprint subsidiary, PCTV Gold, Inc., is licensed by the FCC to operate a Broadband Radio Service in the Saginaw, Michigan area. SpeedNet, a provider of fixed and portable high-speed wireless internet services, leased BRS channels from Sprint pursuant to a Market Operation Agreement (MOA). After entering into the MOA, SpeedNet began negotiations with Clearwire, one of Sprint's competitors, and in August, 2006, SpeedNet and Clearwire executed a Purchase Agreement, under which they agreed to either merge or enter into a joint venture that would offer services using the spectrum leased from Sprint.

On March 1, 2007, Sprint filed a breach of contract action against SpeedNet, seeking injunctive relief and specific performance to enforce SpeedNet's obligation to first offer the sale of its assets to Sprint. In April 2007, Sprint moved for a preliminary injunction to prohibit SpeedNet from transferring its assets or otherwise altering the structure of its company before Sprint's rights under the ROFO provision of the MOA had been adjudicated.

The Court found that the Sprint subsidiary would suffer irreparable harm because "if the district court should later find Sprint is entitled to specific performance, it will be difficult if not impossible to undo the transfer of assets to Clearwire."

Following a hearing on the motion, the Court found that Sprint appeared likely to succeed on the merits of its claims, and that Sprint was subject to irreparable injury if SpeedNet was permitted to merge or enter into a joint venture with Clearwire. The Court entered a preliminary injunction, which enjoins SpeedNet from:

(1) closing upon, transferring assets in furtherance of, or completing any portion of the transaction envisioned in the Purchase Agreement between SpeedNet and Clearwire;
(2) executing or entering in to the draft Joint Venture Agreement between SpeedNet and Clearwire; or
(3) selling or transferring any assets to any third party entity other than transactions in the ordinary course of business.

SpeedNet appealed from portions of paragraphs (2) and (3) of the district court's order relating to the joint venture with Clearwire. The Court recited the standard for granting a preliminary injunction: "Whether a preliminary injunction should issue involves consideration of (1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest." Dataphase Sys., Inc. v. C L Systems, Inc., 640 F.2d 109, 114 (8th Cir.1981). The Court concluded that the district court did not abuse its discretion in granting the preliminary injunction, and properly applied the Dataphase factors. According to the Court:

(1) Sprint is subject to irreparable injury should SpeedNet be permitted to merge or enter into a joint venture with Clearwire because monetary relief will not provide adequate or complete relief to it; (2) Sprint is likely to succeed on the merits as to its claim of SpeedNet breaching the ROFO provision of its MOA agreement with Sprint and must first tender an offer to sell to Sprint before all others; (3) the balance of equities warrants the issuance of a preliminary injunction; and (4) the granting of the preliminary injunction promotes the public interest under Kansas law by protecting the freedom to contract through enforcement of contractual rights and obligations.

With respect to irreparable injury, the Court pointed out that "the SpeedNet JV will alter the structure of SpeedNet before Sprint has the opportunity to purchase it." According to the Court, "if the district court should later find Sprint is entitled to specific performance, it will be difficult if not impossible to undo the transfer of assets to Clearwire."

Moreover, according to the Court, "spectrum has unique characteristics that make its loss one which cannot be fully compensated by an award of money damages." The Court pointed out that "the parties specifically agreed in Section 13.2 of the MOA that because spectrum rights are 'of a special, unique, unusual and extraordinary character,' the non-defaulting party is entitled to obtain injunctive and other equitable relief." Accordingly, the Court concluded that "the district court did not err in finding Sprint will be irreparably harmed if SpeedNet is allowed to execute the SpeedNet JV before Sprint's claims are adjudicated."

With respect to Sprint's likelihood of prevailing on the merits, SpeedNet argued that it did not breach the MOA, and that Sprint is equitably estopped from preventing the SpeedNet JV. As characterized by the Court, "SpeedNet contends it did not breach the ROFO provision because such provision didn't prohibit it from speaking with a third party about a potential sale."

Additionally, SpeedNet contended that the ROFO provision does not apply because Sprint is incapable of matching Clearwire's "unique" offer of privately held stock and warrants. On the other hand, as framed by the Court, "Sprint contends that the ROFO provision requires SpeedNet to inform Sprint when it first considers selling its assets and to provide Sprint with written notice of the sale terms SpeedNet would find acceptable," and that SpeedNet is absolutely prohibited from signing a purchase agreement with a third party prior to offering the sale to Sprint.

Abjuring any need to "decide which interpretation of the ROFO is the correct one," the Court limited its inquiry to the "district court's assessment of Sprint's likelihood to prevail on the merits." The Court concluded that "the district court considered each party's arguments carefully and did not err in concluding Sprint has demonstrated a reasonable likelihood of success on the merits of its claim."

The Court rejected SpeedNet's argument that Sprint is equitably estopped from preventing the SpeedNet JV because Sprint encouraged, promoted and benefitted from it. According to the Court, "a party requesting estoppel must show the other party engaged in affirmative conduct designed to mislead it." Under Kansas law—

a party asserting equitable estoppel must show that another party, by its acts, representations, admissions, or silence when it had a duty to speak, induced it to believe certain facts existed. It must also show it rightfully relied and acted upon such belief and would now be prejudiced if the other party were permitted to deny the existence of such facts…. Estoppel will not be held to exist where facts are ambiguous or subject to more than one construction.

SpeedNet claimed Sprint engaged in affirmative conduct which misled SpeedNet into thinking Sprint supported the SpeedNet JV and it would now be prejudiced if prevented from consummating the deal. The Court acknowledged that "in the absence of SpeedNet's alleged breach of the ROFO provision, SpeedNet might be correct that Sprint would be estopped from attempting to prevent the SpeedNet JV." However, according to the Court, "Sprint cannot be estopped from enforcing the ROFO provision because Sprint never engaged in conduct designed to mislead SpeedNet into thinking it would not enforce the provision.

The Court concluded that the district court did not err in assessing the balance of the harms. The Court found that the alleged harm to SpeedNet—a lost business opportunity—was undermined by the fact that a preliminary injunction would only delay its transfer of assets, and outweighed by the potential harm to Sprint, which would "forever lose its rights to purchase SpeedNet in its current state."

The Court found that the district court adequately considered the pubic interest when it carefully considered SpeedNet's argument about a preliminary injunction giving Sprint a monopoly over the spectrum in the Detroit market. According to the Court, "the transcript suggests the district court was persuaded by Sprint's assurances its alleged monopoly would not harm the public interest." In addition, the district court "considered the public's interest in protecting contractual rights.," and "did not abuse its discretion by concluding its grant of a preliminary injunction promoted the public interest by protecting freedom to contract through enforcement of contractual rights and obligations."

Second Circuit Vacates Settlement of Freelance Writers' Class Action

A unanimous panel of the Second Circuit Court of Appeals held that the copyright registration requirement is jurisdictional. Therefore, the district court could not exercise jurisdiction over a copyright infringement class action that included claims for the infringement of unregistered copyrights. In re Literary Works in Electronic Databases Copyright Litigation, No. 05-5943-cv(L) (2d Cir., November 29, 2007)

Plaintiffs brought a class action against publishers on behalf of freelance writers who contracted to author works for publication in print media, and retained the copyrights in those works. The complaint alleged that the contracts did not grant the publishers the right to electronically reproduce those works or license them for electronic reproduction by others, but that the publishers did so anyway in violation of plaintiffs' copyrights.

"After years of negotiations," according to the Court, "class and defense counsel finally agreed on a settlement." "Following lengthy motion practice, the District Court for the Southern District of New York certified a class and approved the settlement." Dissenting class members appealed.

According to the Court, "the overwhelming majority of claims within the certified class arise from the infringement of unregistered copyrights." The issue on appeal, as framed by the Court, is "whether the District Court had jurisdiction to certify a class consisting of claims arising from the infringement of unregistered copyrights and to approve a settlement with respect to those claims." The Court held that the district court did not have jurisdiction.

The Court recounted the history of the litigation, which began with New York Times Co. v. Tasini, 533 U.S. 483 (2001), in which the Supreme Court held that §201(c) of the Copyright Act does not permit publishers to reproduce freelance works electronically without specific authorization to do so. After the Court decided Tasini, three class actions that had been stayed pending the decision, were reactivated and consolidated in the Southern District of New York.

According to the Court, the case involved two kinds of plaintiffs—individual authors and trade groups representing authors—and two classes of defendants—publishers of original electronic content, such as the New York Times Co., and companies operating databases that license content from publishers, such as Thomson Corporation, the owner of Westlaw.

Liability having been established by Tasini, the district court referred the parties to mediation regarding damages. Defendants took the position that the case had little settlement value because the vast majority of claims could not be certified in any class because the copyrights had not been registered as required by §411(a) of the Copyright Act, which provides that "no action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title." Based on survey evidence, Defendants estimated that less than one percent of the claims satisfied the jurisdictional prerequisite.

"Despite this looming jurisdictional issue," according to the Court, "the desire to achieve global peace in the publishing industry spurred the parties through more than three years of 'often heated' negotiations until they reached an agreement in 2005." The agreement defines the class, "for settlement purposes only," as follows:

All persons who, individually or jointly, own a copyright under the United States copyright laws in an English language literary work that has been reproduced, displayed, adapted, licensed, sold and/or distributed in any electronic or digital format, without the person's express authorization by a member of the Defense Group or any member's subsidiaries, affiliates, or licensees (a) at any time on or after August 15, 1997 (regardless of when the work first appeared in an electronic database) or (b) that remained in circulation after August 15, 1997, even if licensed prior thereto, including English language works qualifying for U.S. copyright protection under an international treaty (hereinafter "Subject Work").

The settlement established three categories of claims. Category A claims concern copyrights that were registered prior to any infringement, and which are eligible for statutory damages and attorney's fees. Category B claims concern copyrights that were registered after the infringing reproduction but before December 31, 2002, and which only qualify for actual damages. Category C claims, "by far the most numerous," according to the Court, concern copyrights registered after December 31, 2002 or never registered at all.

Under the settlement, Category A claimants receive a flat fee; Category B claimants receive the greater of either a flat fee or a percentage of the original price of the work; and, "by and large, Category C claimants also receive the greater of either a flat fee or a percentage of the original price of the work." However, according to the Court, "importantly, if the cost of all claims (plus the cost of notice, administration, and attorney's fees) exceeds $18 million, then the amount paid to Category C claimants is reduced—potentially to zero—before the claims of Category A and B claimants are affected. This feature is called the 'C-reduction.'"

Plaintiffs and Defendants jointly moved for class certification and approval of the settlement. Objections were filed on the ground, withal, that "the disparate treatment of Category C claimants illustrates that named plaintiffs, who each possess at least some registered copyrights, did not adequately represent those absent class members who possess only unregistered copyrights."

The district court granted class certification and settlement approval in September, 2005, but according to the Court, "the District Court never considered whether it had jurisdiction to certify a class consisting mostly of claims arising from unregistered copyrights, or to approve a settlement resolving those claims."

Objectors appealed, and the Court, "became concerned that the District Court and the parties had passed over a nettlesome jurisdictional question." Accordingly, the Court ordered the parties to file briefs "addressing the issue of whether the District Court had subject matter jurisdiction over claims concerning the infringement of unregistered copyrights."

On appeal, the Court emphasized that the Copyright Act's registration requirement is jurisdictional.

Whether this requirement is jurisdictional is not up for debate in this Circuit. On two recent occasions, we have squarely held that it is. See Well-Made Toy Mfg. Corp. v. Goffa Int'l Corp., 354 F.3d 112, 114, 115 (2d Cir.2003) (affirming dismissal for lack of "subject matter jurisdiction" because section 411(a)'s "registration requirement is jurisdictional"); Morris v. Business Concepts, Inc., 259 F.3d 65, 72, 73 (2d Cir.2001) (holding "that subject matter jurisdiction was lacking because the registration requirement of section 411(a) was not satisfied" and affirming dismissal "for lack of subject matter jurisdiction").

The Court refused to overrule its holdings in Morris and Well-Made. "The short answer to these arguments is that this panel simply cannot overrule a prior panel's holding."

The Court further held that "each claim within the certified class must satisfy section 411(a)'s registration requirement." The Court rejected the argument that jurisdiction is proper so long as the named plaintiffs' works were registered.

First, the Court noted that class action certification under Rule 23 does not offer any alternative source of jurisdiction, citing 28 U.S.C. §2072(b), which provides that the federal "rules shall not abridge, enlarge or modify any substantive right," and Fed.R.Civ.P. 82, which provides that "these rules shall not be construed to extend or limit the jurisdiction of the United States district courts."

Under the language of §411(a), according to the Court, "the question, as we see it, is whether the phrase 'the copyright claim' refers to all the claims within the class or only those claims of the named plaintiffs."

The Court agreed that "on the literal level, the language is not dispositive" because "the phrase 'the copyright claim' does not require, or even tend toward, one reading." The Court found, however, that "case law does provide some useful guidance as to how we should interpret that phrase."

The Court observed that "we have applied Article III's jurisdictional requirements to each member of a class," Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir., 2006); and "since statutory and constitutional jurisdictional requirements are equally binding, … the same approach should hold here."

The Court also cited Zahn v. Int'l Paper Co., 414 U.S. 291 (1973) (result overruled by 28 U.S.C. §1367), which held that the diversity statute requires each class member to satisfy the amount-in-controversy requirement. 414 U.S. at 301. The Court held that the phrase "matter in controversy" in §1332(a) refers to each class member's claim and therefore requires each claim to satisfy the statute's amount-in-controversy requirement.

Similarly, in Weinberger v. Salfi, 422 U.S. 749 (1975), the Court addressed whether a district court properly certified a class of Social Security claimants who asserted that they had been denied benefits wrongfully. Section205(g) of the Social Security Act grants subject matter jurisdiction over only "final" decisions of the Secretary. Reviewing a class certification, the Supreme Court concluded that the named plaintiffs' claims satisfied the finality requirement but that claims of absent class members did not.

According to the Court, "we see no reason to interpret or apply the jurisdictional requirement of section 411(a) any differently."

In light of these precedents, we hold that the phrase "the copyright claim" in section 411(a) refers to each claim within a purported class, and thus requires that each class member's claim arise from a registered copyright. Only when each claim satisfies that jurisdictional prerequisite may the district court utilize Rule 23 to "exercise [its] jurisdiction over the various individual claims in a single proceeding."

District Court Holds That Alleged Violation of Patent Exhaustion Doctrine Does Not Support Federal Question Jurisdiction

U.S. District Judge Der-Yeghiayan in the Northern District of Illinois dismissed a suit alleging that patentee "violated" patent exhaustion doctrine by collecting royalties from the manufacturer as well as purchaser of patented disk drives. The Court held that the exhaustion doctrine operates as a defense to a claim of infringement, but does not support a claim for declaratory judgment or federal question jurisdiction. ExcelStor Technology, Inc. v. Papst Licensing GMBH & Co. KG, No. 07 C 2467 (N.D.Ill., October 24, 2007)

In January, 2004, ExcelStor Technology entered into a licensing agreement (ExcelStor Agreement) with Papst Licensing GMBH & Co. KG which entitled ExcelStor to make and sell hard disk drives (HDDs) covered by a Papst patent in consideration for the payment of royalties to Papst. When ExcelStor entered into the agreement, it was unaware that Papst had already entered into another licensing agreement with Hitachi (Hitachi Agreement), which required Hitachi to cover the payment of royalties for the manufacture of the same HDDs that were the subject of the ExcelStor Agreement. The Court reported that neither ExcelStor nor Hitachi were allegedly aware of the terms of the other party's agreement, each of which included a confidentiality clause.

The ExcelStor Agreement also allegedly required Papst to notify ExcelStor, on a quarterly basis, whether Papst was receiving royalties from a purchaser of HDDs manufactured by ExcelStor. The complaint alleged that Papst sent ExcelStor a notice on April 2, 2004, which falsely reported that Papst was not receiving royalties for the HDDs manufactured by ExcelStor from any source other than ExcelStor.

When ExcelStor obtained copies of the Hitachi Agreement, which revealed Hitachi's obligation to pay royalties, ExcelStor filed suit for a declaratory judgment that Papst violated the patent exhaustion doctrine: a declaratory judgment that the ExcelStor agreement was unenforceable inasmuch as it violated the patent exhaustion doctrine; as well as claims for fraud and breach of contract.

The case came before the Court on Papst's motion to dismiss for lack of subject matter jurisdiction, i.e., that the complaint did not present a question of federal law as claimed by ExcelStor. ExcelStor argued that its claims were based on federal patent law, and subject to federal jurisdiction pursuant to 28 U.S.C. §1338, which provides that "the district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents." In particular, according to the Court, "ExcelStor argues that its claims in the instant action are dependant on a ruling based on the first sale doctrine otherwise referred to as the patent exhaustion doctrine." According to the Court:

ExcelStor contends that this court has subject matter jurisdiction in this case because ExcelStor is entitled to relief under the patent exhaustion doctrine. Under the patent exhaustion doctrine, "the unrestricted sale of a patented article, by or with the authority of the patentee, 'exhausts' the patentee's right to control further sale and use of that article by enforcing the patent under which it was first sold." Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094, 1105 (Fed.Cir.2001); LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1369-70 (Fed.Cir.2006).

According to the Court, however, "the patent exhaustion doctrine is not a source of relief for ExcelStor."

It is not a cause of action that a party can bring and obtain relief such as the damages sought by ExcelStor in this action. Rather, the patent exhaustion doctrine is a defense for claims such as a patent infringement claim, prohibiting a party from suing for patent infringement to protect its proprietary rights since the party is deemed to have already received full compensation for ownership in such rights…. The patent exhaustion doctrine is a defense to a patent infringement claim, barring a party from pursuing an infringement claim if the party has already sold the patent rights to another party.

Moreover, "ExcelStor lacks any legitimate basis to seek a declaration that Section 4.3 of the ExcelStor Agreement violates the patent exhaustion doctrine," according to the Court.

ExcelStor is not entitled in a vacuum to have this court resolve an issue that does not present a live case or controversy. The references to the patent exhaustion doctrine by ExcelStor do not confer federal subject matter jurisdiction, and, as indicated above, parties cannot confer federal subject matter jurisdiction upon themselves. Also, the mere raising of a patent defense does not confer federal subject matter jurisdiction…. Thus, ExcelStor has not shown that the declaratory judgment claims in Counts I and II are based upon federal patent law.

The Court also rejected ExcelStor's argument that the fraud claim is substantially based on patent law because it turns on "Papst's false representation that it had complied with the Patent Exhaustion/First Sale Doctrine." According to the Court:

The Notice Provision does not make any reference to the patent exhaustion doctrine. Nor does the Notice Provision obligate Papst to state whether it is violating the patent exhaustion doctrine. Whether or not Papst violated the Notice Provision depends on whether Papst accurately identified other customers receiving the royalties, not whether it violated the patent exhaustion doctrine.

The Court found "no indication that Papst specifically stated in the notices that it was not violating the patent exhaustion doctrine." The Court concluded that "the determination of whether Papst made misrepresentations in the notices involves a factual inquiry that does not require a consideration of federal patent law. Therefore, ExcelStor has not shown that the fraud claim (Count III) is based upon federal patent law."

The Court similarly rejected ExcelStor's argument that the breach of contract claim is based upon the patent exhaustion doctrine. Like the fraud claim, the breach of contract claim was grounded in Pabst's failure to report additional royalty sources, as required by the Agreement. According to the Court, "in determining the contractual obligations of the parties to the ExcelStor Agreement, the terms and intent of the parties in the formation of that particular agreement govern the precise obligations of the parties."

ExcelStor has not shown that general principles of federal patent law would govern the contractual relationship in any way. The terms of the ExcelStor Agreement provide the necessary guidance to resolve whether Papst breached the agreement and to determine the appropriate remedy for a breach. There is no need to consult the patent exhaustion doctrine. ExcelStor's insertion of the patent exhaustion doctrine into this case does not confer federal subject matter jurisdiction.

Finally, the Court rejected the argument that the state law issues are preempted by federal patent law.

ExcelStor argues that "the parties' license agreement must be construed (and thus enforced) in such a way so as not to exceed the proper scope of the patent monopoly that Papst is allowed to have under U.S. federal patent law…." ExcelStor contends that the federal interest in such a monopoly overrides any state interest. However, as is explained above, this action is premised upon a breach of the terms of the ExcelStor Agreement and alleged fraud involving the execution of the agreement. ExcelStor does not allege that the Notice Provision is ambiguous and that its scope is unclear. Whether Papst violated the terms of the ExcelStor Agreement involves a straightforward examination of the terms and facts in this case. ExcelStor alleges that pursuant to the Notice Provision Papst was supposed to report certain royalties from other customers. Whether or not Papst accurately provided such notice is a question of fact. ExcelStor has not shown how any interpretations concerning the scope of the ExcelStor Agreement and its relation to Papst's patent monopoly would come into play in such an analysis. Therefore, ExcelStor has not shown that the state law issues in this case would be preempted by federal law. Also, the possibility that ExcelStor might raise federal preemption as a defense in a state action is not itself a basis for federal subject matter jurisdiction….

District Court Refuses to Dismiss Indictment of Doctors for Prescribing Controlled Substances Over the Internet

U.S. District Judge Garcia-Gregory, in the District of Puerto Rico, denied a motion to dismiss an indictment charging seven doctors with violating the Controlled Substances Act by prescribing drugs over the internet without in-person examination of the customer-patient. The Court held that it was for the jury to decide whether the doctors' conduct exceeds the bounds of professional medical practice, rendering them criminally liable under §841, which prohibits the distribution of controlled substances by doctors when it is done "outside the scope of professional practice and not for a legitimate medical purpose." U.S. v. Rodriguez, Crim. No. 07-032(JAG) (D.P.R., October 24, 2007).

The defendants argued that Puerto Rico Telemedicine Regulating Act, Law No. 227 of August 11, 1998, 20 L.P.R.A. §6001 et seq., authorized them to practice telemedicine and, therefore, allowed them to prescribe controlled substances to their internet customers.

The case came before the Court on review of a Magistrate's Report and Recommendation, which concluded that the Telemedicine Law only authorizes the practice of telemedicine when both the physician and the patient are physically located in the Commonwealth of Puerto Rico. The Magistrate concluded that the "Defendants acted outside the scope of professional practice and not for a legitimate medical purpose when they carried out their telemedicine practice in several States other than Puerto Rico without having the proper licenses to do so in those jurisdictions." As characterized by the Court:

Defendants aver in their objections to the Magistrate-Judge's Report and Recommendation that the Superseding Indictment should be dismissed because they acted in conformity with the Telemedicine Law, which allegedly allows physicians to provide prescriptions to persons outside the geographical jurisdiction of the Commonwealth of Puerto Rico. Contrary to Magistrate-Judge Camille L. Velez-Rive's recommendation, Defendants allege that the Telemedicine Law made it unnecessary for them to obtain separate licenses from each of the States where the patients, who consulted them were located. According to Defendants, their conduct does not fall outside the scope of professional practice and constitutes a legitimate medical purpose.

The Court cited 21 U.S.C. § 841(a)(1), which makes it "unlawful for any person knowingly or intentionally… to manufacture, distribute, or dispense… a controlled substance." According to the Court, "although medical professionals are generally permitted to dispense controlled substances, they 'can be prosecuted under §841 when their activities fall outside the usual course of professional practice,'" quoting United States v. Moore, 423 U.S. 122, 124 (1975); United States v. Fuchs, 467 F.3d 889, 899 (5th Cir.2006).

The Court quotes from the Supreme Court decision in Moore, which states that "physicians who departed from the usual course of medical practice were subject to the same penalties as street pushers" and that Congress had intended the CSA to be more, not less, strict. Moore, 423 U.S. at 139. "Thus," according to the Court, "a physician is authorized to dispense controlled substances only if he acts with a legitimate medical purpose and in the usual course of professional practice." Nelson, 383 F.3d at 1233. "Conversely, a practitioner would be unauthorized to dispense a controlled substance if he acts without a legitimate medical purpose or outside the usual course of professional practice." Nelson, 383 F.3d at 1233. The Court noted that "the Courts of Appeal have upheld convictions of physicians and pharmacists for distributing controlled substances over the Internet," citing United States v. Fuchs, 467 F.3d 889 (5th Cir.2004); and United States v. Nelson, 383 F.3d 1227, 1232 (10th Cir.2006). According to the Court:

In prosecutions under §841 involving distribution of drugs that have been prescribed by a licensed physician, the Government is required to prove three elements: (1) that the defendant distributed a controlled substances, (2) that he or she acted intentionally and (3) that he or she prescribed the drug without a legitimate medical purpose and outside the course of professional practice. United States v. Feingold, 454 F.3d 1001, 1006 (9th Cir.2006); United States v. Johnson, 71 F.3d 539, 542 (6th Cir.1995); United States v. Tran Trong Cuong, 18 F.3d 1132, 1137 (4th Cir.1994); United States v. Varma, 691 F.2d 460, 462 (10th Cir.1982).

The Court emphasized that "the issue of whether a physician's conduct exceeds the bounds of professional medical practice, rendering him criminally liable under §841, is one for determination by a jury." Thus, "this is an element of the offense which the Government must prove to the jury, and is not properly the subject of a motion to dismiss." As characterized by the Court, "in essence, Defendants' objections are brought forth to achieve the dismissal of this case based on the theory that they acted with a legitimate medical purpose and in the usual course of professional practice." Defendants' arguments ignore the fact that the indictment in this case is not premised upon any statute or rule of law that specifically precludes the sale of prescription drugs over the Internet. It is, instead, premised upon a theory that the drugs were prescribed and distributed outside the bounds of professional medical practice. This is an element of the offense, which the Government must prove to the jury, and, therefore, is not properly the subject of a motion to dismiss. Consequently, Defendants' Motion to Dismiss must be denied.

Federal Circuit Rejects Patent Infringement Claim Based on Joint Infringement by Multiple Parties

A unanimous panel of the Federal Circuit Court of Appeals held that a competitor that provided a debit payment system did not infringe patented payment system method because it did not itself perform every step of patented method. The Court emphasized that a party cannot avoid infringement liability simply by contracting out the performance of one or more steps of a patented method, but ruled that absent control or direction of a third party that performs one or more of the steps of the patented method, there can be no liability for infringement by a party that does not perform each step of the patented method. BMC Resources, Inc. v. Paymentech, L.P., No. 2006-1503 (Fed.Cir., September 20, 2007).
BMC Resources, Inc. owns two patents that claim a method for processing debit transactions without a personal identification number (PIN). As described by the Court:

The patented invention provides an interface between a standard touch-tone telephone and a debit card network. On this interface, a customer may perform real-time bill payment transactions with only a telephone keypad. The invention includes an interactive voice response unit (IVR) that prompts the caller to enter an access code, account number, debit card number, and payment amount. This information, in turn, passes to a debit network and on to a banking or financial institution. Each of these entities participates in approving and carrying out the transaction. Using the invention, the caller may also obtain information regarding authorization for the transaction, and inquire about previously processed transactions. Thus, BMC's patents disclose a method for PIN-less debit bill payment (PDBP) featuring the combined action of several participants, including the payee's agent (for example, BMC), a remote payment network (for example, an ATM network), and the card-issuing financial institutions.

BMC filed suit for patent infringement against Paymentech, L.P., which processes financial transactions for its clients. According to the Court, Paymentech processes a PDBP transaction according to the following sequence:

1. the customer calls the merchant to pay a bill using an IVR;
2. the merchant collects payment information from the customer and sends it to Paymentech;
3. Paymentech routes the information to a participating debit network;
4. the debit network forwards the information to an affiliated financial institution;
5. the financial institution authorizes or declines the transaction, and if authorized, charges the customer's account according to the payment information collected by the merchant; and
6. information regarding the status of the transaction moves from the financial institution to the debit network and then, through Paymentech, to the merchant who informs the customer of the status of the transaction.

The district court granted summary judgment of noninfringement for Paymentech, holding that Paymentech had not infringed the claims because it performed some but not all of the steps of the asserted method claims. The Court of Appeals affirmed: "Because the record contains no basis to hold Paymentech vicariously responsible for the actions of the unrelated parties who carried out the other steps, this court affirms the finding of non-infringement."

As framed by the Court, "the case presents the issue of the proper standard for joint infringement by multiple parties of a single claim.... As the parties agree, Paymentech does not perform every step of the method at issue in this case. With other parties performing some claimed method steps, this court must determine if Paymentech may nonetheless be liable for direct infringement under 35 U.S.C. §271(a) (2000).

Section 271(a) states:

Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.

According to the Court, "direct infringement requires a party to perform or use each and every step or element of a claimed method or product." Warner-Jenkinson Co., Inc. v. Hilton Davis Corp., 520 U.S. 17, 117 S.Ct. 1040, 137 L.Ed.2d 146 (1997). "For process patent or method patent claims," according to the Court, "infringement occurs when a party performs all of the steps of the process." Joy Techs., Inc. v. Flakt, Inc., 6 F.3d 770, 773 (Fed.Cir.1993).

The Court noted that "when a defendant participates in or encourages infringement but does not directly infringe a patent, the normal recourse under the law is for the court to apply the standards for liability under indirect infringement." But according to the Court, "indirect infringement requires, as a predicate, a finding that some party amongst the accused actors has committed the entire act of direct infringement." Dynacore Holdings Corp. v. U.S. Philips Corp., 363 F.3d 1263, 1272 (Fed.Cir.2004).

The Court observed that "these rules for vicarious liability might seem to provide a loophole for a party to escape infringement by having a third party carry out one or more of the claimed steps on its behalf." But "to the contrary," according to the Court, "the law imposes vicarious liability on a party for the acts of another in circumstances showing that the liable party controlled the conduct of the acting party."

In the context of patent infringement, a defendant cannot thus avoid liability for direct infringement by having someone else carry out one or more of the claimed steps on its behalf. In [Cross Med. Prods. v. Medtronic Sofamor Danek, 424 F.3d 1293 (Fed.Cir., 2005)], this court refused to attribute the acts of surgeons in making the claimed apparatus to the medical device manufacturer because the medical device manufacturer representative, who appeared in the operating room and identified instruments for the surgeons, did not direct the surgeons' actions. The Court remanded the case for a determination of whether the surgeons directly infringed by making the claimed apparatus and whether the medical device manufacturer could be held vicariously liable for such infringing acts. 424 F.3d at 1312.

BMC argued that the district court erred in dismissing the argument that On Demand Machine Corp. v. Ingram Industries, Inc., 442 F.3d 1331 (Fed.Cir., 2006) sanctioned a finding of infringement by a party who performs some steps of a claim in cases where a patent claims an invention that cannot be performed by one person. In that case, the jury was instructed that —

It is not necessary for the acts that constitute infringement to be performed by one person or entity. When infringement results from the participation and combined action(s) of more than one person or entity, they are all joint infringers and jointly liable for patent infringement. Infringement of a patented process or method cannot be avoided by having another perform one step of the process or method. Where the infringement is the result of the participation and combined action(s) of one or more persons or entities, they are joint infringers and are jointly liable for the infringement.

Although the Court of Appeals affirmed, according to the Court, "it did so without any analysis of the issues presented relating to divided infringement." The district court discounted On Demand because the "decision did not in any way rely on the relationship between the parties," and the Court of Appeals concluded that "the district court properly analyzed the law and this court's cases."

As Paymentech succinctly noted in its brief, "it is unlikely the Court intended to make a major change in its jurisprudence in the On Demand [statement] that was not even directly necessary to its decision in the case."… In other words, BMC's interpretation of On Demand goes beyond settled law. On Demand did not change this court's precedent with regard to joint infringement.

According to the Court, "infringement requires, as it always has, a showing that a defendant has practiced each and every element of the claimed invention."
This holding derives from the statute itself, which states "whoever without authority makes, uses, offers to sell, or sells any patented invention within the United States, or imports into the United States any patented invention during the term of the patenttherefor, infringes the patent." 35 U.S.C. §271(a) (2000). Thus, liability for infringement requires a party to make, use, sell, or offer to sell the patented invention, meaning the entire patented invention.

Where a defendant participates in infringement but does not directly infringe the patent, the law provides remedies under principles of indirect infringement. However, this court has held that inducement of infringement requires a predicate finding of direct infringement. Dynacore, 363 F.3d at 1272.

However, according to the Court, "a party cannot avoid infringement… simply by contracting out steps of a patented process to another entity."
In those cases, the party in control would be liable for direct infringement. It would be unfair indeed for the mastermind in such situations to escape liability. District courts in those cases have held a party liable for infringement.

The Court acknowledged that "the standard requiring control or direction for a finding of joint infringement may in some circumstances allow parties to enter into arms-length agreements to avoid infringement." However, "this concern does not outweigh concerns over expanding the rules governing direct infringement."

For example, expanding the rules governing direct infringement to reach independent conduct of multiple actors would subvert the statutory scheme for indirect infringement. Direct infringement is a strict-liability offense, but it is limited to those who practice each and every element of the claimed invention. By contrast, indirect liability requires evidence of "specific intent" to induce infringement. Another form of indirect infringement, contributory infringement under §271(c), also requires a mens rea (knowledge) and is limited to sales of components or materials without substantial noninfringing uses. Under BMC's proposed approach, a patentee would rarely, if ever, need to bring a claim for indirect infringement.

The Court pointed out that "the concerns over a party avoiding infringement by arms-length cooperation can usually be offset by proper claim drafting." According to the Court, "a patentee can usually structure a claim to capture infringement by a single party." The Court suggested that "in this case, for example, BMC could have drafted its claims to focus on one entity."

The steps of the claim might have featured references to a single party's supplying or receiving each element of the claimed process. However, BMC chose instead to have four different parties perform different acts within one claim. BMC correctly notes the difficulty of proving infringement of this claim format. Nonetheless, this court will not unilaterally restructure the claim or the standards for joint infringement to remedy these ill-conceived claims.

Applying the rule to the instant case, the Court concluded that "BMC's charges against Paymentech properly results in a finding of no infringement." The Court held that while BMC offered evidence of some relationship between Paymentech and the debit networks, the "evidence was insufficient to create a genuine issue of material fact as to whether Paymentech controls or directs the activity of the debit networks."

Without this direction or control of both the debit networks and the financial institutions, Paymentech did not perform or cause to be performed each and every element of the claims. In this situation, neither the financial institutions, the debit networks, nor the payment services provider, Paymentech, bears responsibility for the actions of the other.

Fourth Circuit Gives Novell 'Half a Loaf' in Antitrust Case Against Microsoft

The Fourth Circuit Court of Appeals held that Novell, Inc. had standing to bring antitrust claims against Microsoft arising from Microsoft's monopolization of the PC operating system market because "its popular applications, though themselves not competitors or potential competitors to Microsoft's Windows, offered competing operating systems the prospect of surmounting the applications barrier to entry and breaking the Windows monopoly. However, the Court found that the Novell claims alleging injury in the office productivity market were barred by the statute of limitations, which was not tolled by the government's antitrust case against Microsoft because "the office-productivity market... is neither identical to nor completely encompassed by the PC operating-system market at issue in the government action." Novell, Inc. v. Microsoft Corp., No. 06-1134 (4th Cir., October 15, 2007).

The case came before the Court on cross appeals from two interlocutory orders in an antitrust action filed by Novell, Inc. against Microsoft Corp. in the wake of Microsoft's settlement of antitrust claims brought by the federal government. As described by the Court:

Novell pursues six claims on appeal. Four of these, styled Counts II, III, IV, and V, allege monopolization or attempted monopolization of the markets for office-productivity applications. Novell's products, Word Perfect and Quattro Pro, directly competed in such markets. The other two claims, Counts I and VI, are based on the same alleged conduct as Counts II through V and seek recovery for damage to the same Novell products, but are predicated on the theory that Microsoft's conduct injured competition in the market for PC operating systems, a market in which Novell did not directly compete.

According to the Court, all six of Novell's claims arose prior to March 1996, and are time-barred under the four-year federal statute of limitations for antitrust actions, 15 U.S.C. §15b, unless the statute of limitations is tolled by the filing of the DOJ complaint in May 1998, which tolls the statute of limitations for private antitrust actions "based in whole or in part on any matter complained of" by the government.

On Microsoft's motion, the district court dismissed Counts II through V of Novell's complaint on the ground that the claimed injury was not specifically alleged in the DOJ complaint, and therefore the statute of limitations on those claims was not tolled. The district court denied Microsoft's motion to dismiss Counts I and VI, finding that Novell has antitrust standing to raise those claissms. The district court certified its rulings for interlocutory review.

The Court first reviewed the district court's ruling that Novell has antitrust standing to bring Counts I and VI. According to the Court, "Novell concedes that its products did not directly compete in the market for PC operating systems," but "contend[ed] that the technological connection between operating systems and applications gives rise to a significant barrier to entry into the operating-systems market and thus protects Microsoft's Windows monopoly. As explained by the Court, "Novell maintains that its office-productivity applications could perform well on a variety of operating systems and that, during the relevant time period, they were the dominant office-productivity applications in the market."

The thrust of Novell's argument is that its popular applications, though themselves not competitors or potential competitors to Microsoft's Windows, offered competing operating systems the prospect of surmounting the applications barrier to entry and breaking the Windows monopoly. That is, Novell argues its products could provide a path onto the operating-system playing field for an actual competitor of Windows, because a competing operating system, running the popular Novell software applications, would offer consumers an attractive alternative to Windows.

Novell alleged three unlawful actions on the part of Microsoft that harmed its products and also harmed competition in the PC operating-systems market. As characterized by the Court—

First, Novell claims Microsoft withheld frosm Novell key technical information necessary to make well-functioning office-productivity applications for Windows 95….
Second, Novell argues that Microsoft impeded Novell's access to distribution channels, including original equipment manufacturers ("OEMs")….
Finally,… Novell claims that Microsoft required it, as a condition of being certified as Windows-compatible, to use Windows-specific technologies that degraded the performance of Novell's office-productivity applications on other operating systems….

In Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters ("AGC"), 459 U.S. 519, 529-30, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983), the Supreme Court held that a multi-factor analysis is required to determine whether a private plaintiff has antitrust standing. The Fourth Circuit distilled five factors in Kloth v. Microsoft, 444 F.3d 312 (4th Cir., 2006):

(1) the causal connection between an antitrust violation and harm to the plaintiffs, and whether that harm was intended; (2) whether the harm was of a type that Congress sought to redress in providing a private remedy for violations of the antitrust laws; (3) the directness of the alleged injury; (4) the existence of more direct victims of the alleged antitrust injury; and (5) problems of identifying damages and apportioning them among those directly and indirectly harmed.

Applying those factors in this case, the Court found that "the injury that Novell alleges here is plainly an injury to competition that the anti-trust laws were intended to forestall," and "the analysis of the causal link between these activities and the decline in Novell's office-productivity-applications market share is straightforward."

Microsoft's use of its monopoly power in the operating-system market to foreclose the distribution channels for Novell's applications, for example, would have naturally tended to decrease Novell's market share and consequently decrease the value of its applications. Likewise, withholding crucial data on its soon-to-be-released Windows 95 operating system would have put Novell at a competitive disadvantage vis-a-vis Microsoft's office-productivity applications, leading naturally to a loss of market share for Novell. This loss of market share could make a competing operating system featuring Novell's office-productivity applications less attractive to consumers, harming that competing operating system's potential to surmount the barrier protecting the Windows monopoly.

"In sum," according to the Court, "the first two AGC factors weigh in favor of granting Novell antitrust standing."

The facts alleged by Novell, taken as true for the purposes of this appeal, are sufficient to demonstrate that Novell suffered an antitrust injury and that its injury can be traced to Microsoft's alleged antitrust violations. While the showing of an antitrust injury demonstrates that a case is of the type for which antitrust standing is recognized, such a showing is not necessarily sufficient to demonstrate that the particular plaintiff has antitrust standing. Thus, we now turn to an analysis of the remaining AGC factors.

The latter three AGC factors—"the directness of the alleged injury;" "the existence of more direct victims of the alleged antitrust injury;" and "problems of identifying damages and apportioning them among those directly and indirectly harmed"—"are intended to further restrict entry into the federal courts for private enforcement of the antitrust laws," according to the Court.

The Court found that "Microsoft's withholding of information from Novell's software developers relating to Windows 95 clearly has no more direct victim than Novell," and that "Novell may be the best-situated plaintiff to assert these claims. Indeed, today Novell may be one of the few private plaintiffs whose claims in this regard are neither time-barred nor too tenuous to support antitrust standing."

With respect to the fifth factor, the Court observed that "there is little risk that any damages Novell might prove would need to be allocated or apportioned among any more-directly injured parties."

In sum, according to the Court, "we therefore find that the AGC factors favor granting standing to Novell to assert Counts I and VI," and "thus affirm the district court's denial of Microsoft's motion to dismiss as to these claims on the antitrust-standing issue."

With respect to Novell's standing to bring Counts II through V, the Court rejected Novell's argument that there was a substantial overlap between its own claims and those brought by the Government. According to the Court, "Novell's reading would require us to look beyond the face of the DOJ complaint," which "only expressly alleges harm to the markets for PC operating systems and for Internet browsers." The Court found that "Novell's allegations of harm to the office-productivity-applications market… overlap little with the subject matter of the DOJ complaint.

In addition, "a straightforward application of the different-markets rule also bars application of the tolling provision here."

Though Novell characterizes the different-markets rule as merely "a helpful rule of thumb," … Novell cites only cases involving either the same markets in the government and private suits, or markets much more closely linked than the PC operating-system market and the office-productivity-applications market. Indeed, the Supreme Court has accepted tolling only where the private plaintiffs make claims in markets identical to, or completely encompassed by, those at issue in the earlier government suit…. Because the office-productivity market at issue in Counts II through V is neither identical to nor completely encompassed by the PC operating-system market at issue in the government action, these cases are of little service to Novell.

Accordingly, "we therefore hold that the tolling provision of §5(i) of the Clayton Act does not preserve Counts II through V of Novell's complaint. After tarrying with these claims for more than eight years, Novell cannot now resurrect stale causes of action, and Microsoft is entitled 'to the comfort of repose.'"